Article: 60% of oil price is speculation

Discuss life, the universe, and everything with other members of this site. Get to know your fellow polywell enthusiasts.

Moderators: tonybarry, MSimon

MSimon
Posts: 14331
Joined: Mon Jul 16, 2007 7:37 pm
Location: Rockford, Illinois
Contact:

Post by MSimon »

dnavas,

The cow thinggie: it is referred to as "The Tragedy of the Commons". Google it.

What causes it? No one owns the commons. It is not a failure of the market. It is a failure of a resource to be included in the market.

http://powerandcontrol.blogspot.com/200 ... t-all.html

The difficulty with water rights in America right now is that the owners of those rights can't sell their water. Addressed in the above link about 1/2 way in.

Same goes for oil resources offshore. Once some one owns them (outright or by lease) they will get developed as it becomes economic to do so. Same goes for oil shale - once the states involved lift the moratorium.
Engineering is the art of making what you want from what you can get at a profit.

jmc
Posts: 427
Joined: Fri Aug 31, 2007 9:16 am
Location: Ireland

Post by jmc »

Not sure I have as much problem with drilling for oil offshre as I do with destroying 55,000 square miles of Canadian forest.

I still say the market's ability to anticipate is highly limited. I think free thinking academics are a little better (not perfect mind you) and sometimes it takes public funds to realise the better solution that takes all the externalities into account.

Offshore oil is a short term fix, in the long run we need to move away from fossil fuels period.

MSimon
Posts: 14331
Joined: Mon Jul 16, 2007 7:37 pm
Location: Rockford, Illinois
Contact:

Post by MSimon »

jmc wrote:Not sure I have as much problem with drilling for oil offshre as I do with destroying 55,000 square miles of Canadian forest.

I still say the market's ability to anticipate is highly limited. I think free thinking academics are a little better (not perfect mind you) and sometimes it takes public funds to realise the better solution that takes all the externalities into account.

Offshore oil is a short term fix, in the long run we need to move away from fossil fuels period.
All fixes are short term.

And we are moving away from oil. It is going to take 50 to 100 years. In the mean time supplies should be developed to support raising people out of poverty.
Engineering is the art of making what you want from what you can get at a profit.

jmc
Posts: 427
Joined: Fri Aug 31, 2007 9:16 am
Location: Ireland

Post by jmc »

But the poorer countries tend to be net exporters and the richer countries tend to be net importers.

Wouldn't a higher oil price therefore bring more capital from the richer countries into the poorer ones?

MSimon
Posts: 14331
Joined: Mon Jul 16, 2007 7:37 pm
Location: Rockford, Illinois
Contact:

Post by MSimon »

jmc wrote:But the poorer countries tend to be net exporters and the richer countries tend to be net importers.

Wouldn't a higher oil price therefore bring more capital from the richer countries into the poorer ones?
No. The poorer countries have a political problem. The higher incomes do not get translated into infrastructure.

It is use of the resources by individuals that translate into higher standards of living. Thus high costs disparately impact the poor. In addition only some poor countries have resources to export.
Engineering is the art of making what you want from what you can get at a profit.

ravingdave
Posts: 650
Joined: Wed Jun 27, 2007 2:41 am

Post by ravingdave »

dnavas wrote:>>>
Market forces are driven by people who freely choose to spend their money as they see fit. Sometimes these people do foolish things in excersizing their freedom to wastefully burn fossil fuels, but the market will punish them eventually and Nature will put things right.
<<<

Ah, if only that were accurate. One doesn't have to look far afield to see that this isn't the way these things work.

Have you noticed who will be bailing out those "people" who did "foolish things" in the housing market? It won't be "those people"....


That's a completely unfair assesment. My understanding of the current economic crisis is that it is the result of people defaulting on sub prime mortgages. It appears that under pressure from the government, loans were given to people who never should have gotten them, and could not pay them back.

According to what I'VE been reading, the Democrats were lamenting that poor minorities were being unfairly denied loans, (RACISM!) so the Government insisted that they be given loans with little thought to their ability to pay them back. Add in a little coruption, and fraud, and oila ! you have our current crisis.

The unfair part is blaming the market for a crisis created by Governmental interference.
dnavas wrote: Everyone here has a self-interest in having it done "right", so that we don't have to pay for it later....

As far as self-correcting, the free market fails to address resource-limited allocation whenever short-term self-interest drives hoarding behavior. I'm sure there's a technical term for it, but I don't know what it is. The canonical example I've heard is the cow ranchers and public open fields. It is in each rancher's short term interests to put as many of his cows onto the field as possible, even if there are already too many cows on the fields, because each additional cow is getting food not just from his existing cows, but from all of the other rancher's cows as well. Each rancher's self-interest is identical, and it leads to a sub-optimal overall result.

The same basic problem underlies any resource management problem -- land-use, water-rights, oil, you name it.

I'm a big believer in letting the free market be free, but I'm under no illusions that it delivers from all evil....

-Dave


I believe what you are refering to is called "the paradox of the commons" or some such, (no, I don't have time to "google" it.) and who said anything about the free market "delivering us from evil". The free market is just as evil as any other human institution and people are always trying to game the system.

The free market can do plenty of evil things, and that is why it needs to be watched. Most of the evil things result from people trying to use the force of government or monopoly to subvert the free market.

Apart from that, without a feed back mechanism, the ebb and flow of supply and demand can oscillate with some crests forming booms and some troughs forming busts. For much of our history since Adam Smith, this is exactly what used to happen.



David

IntLibber
Posts: 747
Joined: Wed Sep 24, 2008 3:28 pm

Post by IntLibber »

ravingdave wrote:
dnavas wrote:>>>
Market forces are driven by people who freely choose to spend their money as they see fit. Sometimes these people do foolish things in excersizing their freedom to wastefully burn fossil fuels, but the market will punish them eventually and Nature will put things right.
<<<

Ah, if only that were accurate. One doesn't have to look far afield to see that this isn't the way these things work.

Have you noticed who will be bailing out those "people" who did "foolish things" in the housing market? It won't be "those people"....


That's a completely unfair assesment. My understanding of the current economic crisis is that it is the result of people defaulting on sub prime mortgages. It appears that under pressure from the government, loans were given to people who never should have gotten them, and could not pay them back.

According to what I'VE been reading, the Democrats were lamenting that poor minorities were being unfairly denied loans, (RACISM!) so the Government insisted that they be given loans with little thought to their ability to pay them back. Add in a little coruption, and fraud, and oila ! you have our current crisis.

The unfair part is blaming the market for a crisis created by Governmental interference.
Exactly right. Worse yet, when house and senate republicans tried to rein in Fannymae and Freddymac last year, to limit them dumping poor quality mortage paper on the REIT market, congressional Democrats killed the bill written by Senator Sununu. Now Sununu is being challenged for his senate seat by Jeanne Shaheen who is trying to blame him for the democrats mess.

dnavas
Posts: 84
Joined: Sun Nov 11, 2007 3:59 am

Post by dnavas »

MSimon wrote:dnavas,
The cow thinggie: it is referred to as "The Tragedy of the Commons".
What causes it? No one owns the commons. It is not a failure of the market.
Awesome! I'll probably forget what it's called in another half dozen days, but I appreciate the pointer. And highly ironic the context I'm using it in, isn't it? Well, I was amused :)

Of course, it does nothing to address the public bailout issue we're having with the current market-which-went-wrong, which is far more personally irksome, but :shrug:

So, rethinking oil&water&mineral rights, etc.... Seems like making a market for water would be very difficult. Who owns it? The person whose land it falls on? The person who owns the swamp that prefilters it? The guy who owns the land the river runs through and floods every year that wants a dam, or another guy who wants to fish on the river on his property and doesn't want a dam? Not so easy.

If oil had a working market, and "markets work", then oil would be being used at roughly the rate of renewal. We're something like six orders of magnitude away (very roughly :)), so something has to give, and pretty dramatically. While oil is plentiful, the lack of a working market isn't of real concern (and granted that within the context of *energy*, the market might appear somewhat healthier/saner)....

I wouldn't even know where to begin valuing a non-renewable resource. What would a working market for mineral extraction rights even look like?!

Thanks,
-Dave
Last edited by dnavas on Thu Sep 25, 2008 4:38 pm, edited 1 time in total.

dnavas
Posts: 84
Joined: Sun Nov 11, 2007 3:59 am

Post by dnavas »

ravingdave wrote: That's a completely unfair assesment. My understanding of the current economic crisis is that it is the result of people defaulting on sub prime mortgages. It appears that under pressure from the government, loans were given to people who never should have gotten them, and could not pay them back.
Your understanding is wrong.

What happened was a relatively simple financial boom/bust. No one forced bond holders to value bonds at certain levels. Bond tranches were valued based on faulty risk assessment. Assumptions were made regarding future defaults as well as future home prices. As long as home prices went up, the cost of defaults was benign, and the value of the lowest tranches was high. Companies were built to take advantage of the "credit spread", and Wall Street brokerage houses were among the worst offenders.

Those of us investing in this market thought we knew how an economy would respond to housing weakness -- people would dump their credit cards and car loans before they let their houses go. There would be time to remove ourselves from holding weak housing debt, because it would be the credit card companies and folks like GMAC that would go belly-up first. Further, the last time housing fell in the way that it has was when employment was MUCH lower.

In short, we had our canaries wrong.

If you're buying the line that this had something to do with forced lending, then I'd get angry with the people spouting those lies. No doubt they want your money for something. Probably a bailout. I repeat, NO ONE forced rating agencies to mis-value bonds. This was a financial bubble just exactly like the Internet one a few years ago, fueled by Greenspan's promise not to raise rates.
According to what I'VE been reading, the Democrats were lamenting that poor minorities were being unfairly denied loans, (RACISM!) so the Government insisted that they be given loans with little thought to their ability to pay them back. Add in a little coruption, and fraud, and oila ! you have our current crisis.
This crock shouldn't pass anyone's smell test. Neither Democrats nor Republicans own the market for MBS or any other kind of CDO. For one thing, most of the buyers are overseas. It was the MBS market that was recycling dollars back into the economy from foreign countries. Heck, most of our government officials don't even know what they are, never mind swaps or caps. I have no doubt that such hanky panky did and will take place, but it has virtually nothing to do with our current situation.

-Dave

Edit: try this link if you want to get your scare on: http://www.bloomberg.com/apps/news?pid= ... 4WChWa9tys

MSimon
Posts: 14331
Joined: Mon Jul 16, 2007 7:37 pm
Location: Rockford, Illinois
Contact:

Post by MSimon »

The Tragedy of the Commons - Garrett Hardin
Engineering is the art of making what you want from what you can get at a profit.

MSimon
Posts: 14331
Joined: Mon Jul 16, 2007 7:37 pm
Location: Rockford, Illinois
Contact:

Post by MSimon »

dnavas,

The government forced banks to issue unsound loans.

We have two choices: A hit now. Or a drying up of credit ala 1929.

The First may cost up to a trillion. A total meltdown about $50 trillion.

Unfortunately the bail out does not force FM/FM to clean up the lending practices Congress forced on it.

BTW some think the Feds could make a profit on the deal.
Engineering is the art of making what you want from what you can get at a profit.

dnavas
Posts: 84
Joined: Sun Nov 11, 2007 3:59 am

Post by dnavas »

MSimon wrote:dnavas,

The government forced banks to issue unsound loans.
The federal government did not force banks to accept liar (unstated income) loans. The market did. When all the upstarts are accepting them, then you do as well, or you go out of business. In fact, Freddie and Fannie were prevented by law from lending subprime, and while they had low-doc loans (because they were pushed to do so by the market) they had no NINA loans, and they were at least fixed-rate and conforming. Aside from which, they were constrained by regulators prior to the real takeoff in home prices anyway.

Around 2003 the percentage of mortgages held as ABS NOT through Fannie or Freddie was something like 7%. By 2006 it was 20%. They were being left behind by the market.

A similar statistic shows dramatic increase in subprime lending between 2002 and 2006. Volume rose from around $200b to ~$700b, and the share of subprime lending to the entire market rose from somewhere around 7% to a bit over 25%. MBS accounted for something like a fourth of the entire bond market. To think that this was explained by "banks being forced to sell loans to poor folk" is an utter trivialization of the problem.

Now, what Fannie and Freddie DID do was purchase the top bond tranches of OTHER subprime lenders. These purchases did count towards their obligations to lend to lower-income home buyers, and I'm sure that this, along with the normal amount of government stupidity, is why the GSEs have become the favored whipping boys.

But the real problem is that the ratings agencies slapped A and over on tranches of subprime bond deals based on models of default rates based on historical data and assumptions about future home price growth based on recent history (rather than a more sensible model that might start with an assumption that home prices can't sustainably grow much faster than wages).

Remember the problem -- the problem is NOT that banks own these loans or some pieces of them. The problem is that banks OVERPAID for them, have LEVERAGED these assets, and now have to write their values down. Writing down the price of a leveraged asset can get you into a LOT of trouble. cref: LTCM

MSimon
Posts: 14331
Joined: Mon Jul 16, 2007 7:37 pm
Location: Rockford, Illinois
Contact:

Post by MSimon »

Obviously you are unfamiliar with the hue and cry over redlining and "The Community Redevelopment Act".

You might also want to look into what ACORN had to do with all this.

This is an educational forum. So here is your opportunity to get educated:

http://ibdeditorial.com/IBDArticles.asp ... 0789279709
But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street's most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Reinvestment Act*, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but "predatory."

Yes, the market was fueled by greed and overleveraging in the secondary market for subprimes, vis-a-vis mortgaged-backed securities traded on Wall Street. But the seed was planted in the '90s by Clinton and his social engineers. They were the political catalyst behind this slow-motion financial train wreck.

And it was the Clinton administration that mismanaged the quasi-governmental agencies that over the decades have come to manage the real estate market in America.

As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.
Read the whole thing.

The profits were privatized the losses socialized (backed by the government).

So what I would like from you is that before you continue spouting that you actually research the matter. Google is your friend.

A certain President tried to get something passed in 2003 to reign in the problem. A certain Senator also tried in 2005.

From 2003:
"These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis," said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. "The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing."


So I'd love to have an intelligent conversation on the subject. But a few facts would be helpful.

You might also want to look into a guy on a certain Presidential Candidate's VP selection committee. Jim Johnson. You might also want to look into Daniel Mudd's effusive praise of the Congressional Black Caucus. He singled out a certain Senator for special praise. A Senator who has extensive ties to CooK County (informally known as Crook County), Illinois.

That should be enough to get you started.
Engineering is the art of making what you want from what you can get at a profit.

Helius
Posts: 465
Joined: Sun Oct 21, 2007 9:48 pm
Location: Syracuse, New York

Post by Helius »

The Cornerstone of this crisis is the home mortgage interest deduction, a contrivance whereby the no principal repayment, infinite term, interest only loan makes sense. The longer the term, the greater the interest deduction. The interest only mortgage payment allows your whole mortgage payment to be tax deductible. "You can buy more house!" 30 year mortgages pervade over 15 year mortgages, and particle board McMansions in sprawling tracks are now the norm over tight communities at city's edge.

I won't hold my breath that the Home mortgage interest deduction will ever go away; After all Americans love their gamey contrivances, and prefer to tax (and discourage) productive behavior such as *work* and *investment* over resource consumption and the negative investment (loan) of the home Mortgage.

ravingdave
Posts: 650
Joined: Wed Jun 27, 2007 2:41 am

Post by ravingdave »

dnavas wrote:
ravingdave wrote: That's a completely unfair assesment. My understanding of the current economic crisis is that it is the result of people defaulting on sub prime mortgages. It appears that under pressure from the government, loans were given to people who never should have gotten them, and could not pay them back.
Your understanding is wrong.

What happened was a relatively simple financial boom/bust. No one forced bond holders to value bonds at certain levels. Bond tranches were valued based on faulty risk assessment. Assumptions were made regarding future defaults as well as future home prices. As long as home prices went up, the cost of defaults was benign, and the value of the lowest tranches was high. Companies were built to take advantage of the "credit spread", and Wall Street brokerage houses were among the worst offenders.

What was driving the prices up ? Too much control of money in the hands of the stupid and the crooked. The risk of bad loans was removed by implicit Governmental guarantees.
dnavas wrote: Those of us investing in this market thought we knew how an economy would respond to housing weakness -- people would dump their credit cards and car loans before they let their houses go. There would be time to remove ourselves from holding weak housing debt, because it would be the credit card companies and folks like GMAC that would go belly-up first. Further, the last time housing fell in the way that it has was when employment was MUCH lower.

In short, we had our canaries wrong.
I would think the phrase "too clever by half" applies here. In my opinion, most of our economic problems stem from the fact that credit is too easy, and as a result people try to create and use complicated economic schemes to make money. Many of them appear to be the ole razamataz and it's no wonder that people end up getting burned.

dnavas wrote: If you're buying the line that this had something to do with forced lending, then I'd get angry with the people spouting those lies. No doubt they want your money for something. Probably a bailout. I repeat, NO ONE forced rating agencies to mis-value bonds. This was a financial bubble just exactly like the Internet one a few years ago, fueled by Greenspan's promise not to raise rates.

"Lies" is a bit harsh. People can honestly be wrong about something without lying. In any case, this video shows documents which tend to demonstrate the point in question.
http://www.youtube.com/watch?v=H5tZc8oH ... state.com/

dnavas wrote:
ravingdave wrote:

According to what I'VE been reading, the Democrats were lamenting that poor minorities were being unfairly denied loans, (RACISM!) so the Government insisted that they be given loans with little thought to their ability to pay them back. Add in a little coruption, and fraud, and oila ! you have our current crisis.
This crock shouldn't pass anyone's smell test. Neither Democrats nor Republicans own the market for MBS or any other kind of CDO. For one thing, most of the buyers are overseas. It was the MBS market that was recycling dollars back into the economy from foreign countries. Heck, most of our government officials don't even know what they are, never mind swaps or caps. I have no doubt that such hanky panky did and will take place, but it has virtually nothing to do with our current situation.

-Dave

Edit: try this link if you want to get your scare on: http://www.bloomberg.com/apps/news?pid= ... 4WChWa9tys

Don't need more scareing. Been scared for years. I think the current financial mess is not caused by any one thing, but by the vector sum of many things. "I" think the main fault lies with governmental meddelling by the same people who set the bad example of pilling debt on top of debt.

I find it amusing that organizations (like the Federal Government and others) that don't understand you can't spend more than you make (long term) think they know how to manage finances.

Yeah, that's just what we need. Hiring the arsonists to put out the fire they created.


David

Post Reply